ETF Trends
ETF Trends

Despite all the misgivings about riskier assets in a volatile year, speculative-grade debt related exchange traded funds have steadily strengthened as yields on junk bonds dip to levels not seen since last summer.

Year-to-date, the iShares iBoxx $ High Yield Corporate Bond ETF (NYSEArca: HYG) and the SPDR Barclays High Yield Bond ETF (NYSEArca: JNK), the two largest high-yield corporate bond ETFs by assets, gained 11.1% and 11.9%, respectively. HYG now comes with a 5.59% 30-day SEC yield and JNK shows a 6.00% 30-day SEC yield.

The market-cap weighted yield on bonds included in eh Bank of America Merrill Lynch US High-Yield Index is 6.54%, the lowest level since June 2015 before the market sold off over speculation on energy defaults due to a plunge in oil prices, reports Gavin Jackson for the Financial Times.

SEE MORE: Falling Oil Prices Renew High-Yield, Junk Bond ETF Concerns

Nevertheless, with yields down and bond prices higher, investors are still finding enough compensation for the risks they take. Supporting the speculative-grade debt market, global central banks’ accommodative measures, notably their massive quantitative easing programs, have depressed sovereign bond yields and pushed investors toward riskier high-yield bonds.

“Today you have close to almost 50 per cent of the European high-yield market yielding 2 per cent or less,” Andrew Jessop, head of global high-yield at Pimco.

Consequently, the ongoing global search for yield has also caused many to flock toward the relatively more attractive payouts in the U.S. Around 18% of the world’s yield comes from U.S. junk bonds despite the assets only making up 4% of the total bond market, according to an analysis by TwentyFour Asset Management of the Barclays Multiverse index.

SEE MORE: Monitoring Junk Bond ETF Technicals

Looking at the U.S. debt market, credit risks seem to be fading. Many of the more distressed commodity companies have filed for bankruptcy already or reduced debt levels and away from commodities-exposed companies. Default rates on junk bonds are at 5.5% in the U.S.

We are in an “unusually low default rate environment,” Jessop added.

For more information on the speculative-grade debt market, visit our junk bonds category.

iShares iBoxx $ High Yield Corporate Bond ETF